Economic Viability of Small Scale Shrimp (Penaeus Sri Lanka: Monodon) Farming in The North-Western Province of

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is Final Project 2014
ECONOMIC VIABILITY OF SMALL SCALE SHRIMP (Penaeus

monodon) FARMING IN THE NORTH-WESTERN PROVINCE OF
SRI LANKA
Menake Gammanpila
Inland Aquatic Resources and Aquaculture Division (IARAD)
National Aquatic Resources Research and Development Agency (NARA)
Colombo 15, Sri Lanka
menakegammanpila@gmail.com
Supervisor:
Pall Jensson
Reykjavik University, Iceland
pallj@ru.is
ABSTRACT
Shrimp export is the second most valuable export of fish and fishery products of Sri Lanka and
it was 8% of during 2013. Among many commercial aquaculture initiatives so far, shrimp (P.
monodon) farming has been the most lucrative, but the business is subject to high risk and
uncertainties since it started in the mid-1980s. The present study evaluates the profitability and
risks associated with semi intensive small scale shrimp aquaculture practices in the north-
western province of Sri Lanka. Data and information for profitability analysis of the operation
over 10 years were collected from small scale shrimp aquaculture farms in the Puttalam district,
Sri Lanka, during April to August, 2014. Economic analysis revealed that the variable cost per
unit production and break-even production for the black-tiger shrimp through semi-intensive
culture system is 4.4 US$/kg and 2,500 kg respectively. Assuming minimum acceptable rate
of return (MARR) of this study is 15%, the NPV value at the end 10 years was found 33,003
US$ for the total capital invested and 34,993 US$ for the equity. Internal Rate of Return (IRR)
for the total capital investment is 41% and 74% for the equity. At the end of the ten years, sum
of total and net cash flow is 95,176 US$ and 84,093 US$ respectively. Pay-back period for the
capital investment is 3 years and it was two years for the equity. Sensitivity analysis indicated
that profitability was highly sensitive to changes in sales price. When the value of the sales
price falls by 20% or more, the IRR value becomes 13% and is not profitable. The sales price
has frequency of 28% of receiving negative NPV, followed by sales quantity (6%) and variable
cost (5%). Results of present study indicates that investment is highly profitable although the
shrimp farming is most sensitive to changes in sales price.
Key words: Cost-benefit analysis, Economic viability, Profitability, Shrimp farming
This paper should be cited as:

Gammanpila, M. 2015. Economic Viability of small scale shrimp (Penaeus monodon) farming in the north-
western province of Sri Lanka. United Nations University Fisheries Training Programme, Iceland [final
project].http://www.unuftp.is/static/fellows/document/menake14prf.pdf
Gammanpila
TABLE OF CONTENTS
1 INTRODUCTION......................................................................................................................... 5
1.1 Objectives .............................................................................................................................. 6
2 LITERATURE REVIEW............................................................................................................. 7
2.1 Distribution of shrimp (Penaeus monodon) .......................................................................... 7
2.2 Ecology and life history of P. monodon shrimp .................................................................... 7
2.3 Present situation of world shrimp aquaculture ...................................................................... 8
2.4 Overview of the shrimp aquaculture in Sri Lanka ................................................................. 9
2.4.1 Importance of shrimp aquaculture in Sri Lanka ................................................................ 9
2.4.2 Culture facility of shrimp (P. monodon) farming in Sri Lanka ....................................... 10
2.5 The economics of shrimp farming at the farm level ............................................................ 10
3 METHODOLOGY ..................................................................................................................... 12
3.1 Sampling site description..................................................................................................... 12
3.2 Data collection ..................................................................................................................... 12
3.3 Analytical technique ............................................................................................................ 13
3.4 Profitability model of shrimp farming ................................................................................. 13
3.5 Measures of profitability ..................................................................................................... 13
3.5.1 Viability of investments .................................................................................................. 13
3.5.2 Financial ratios ................................................................................................................ 15
3.6 Risk analysis ........................................................................................................................ 15
3.6.1 Sensitivity analysis .......................................................................................................... 16
3.6.2 Scenario analysis ............................................................................................................. 16
3.6.3 Monte Carlo simulation................................................................................................... 16
3.6.4 Qualitative risk analysis .................................................................................................. 16
3.7 Assumptions ........................................................................................................................ 16
3.7.1 Initial investment requirement ........................................................................................ 17
3.7.2 Total cost/Operational cost.............................................................................................. 18
3.7.3 Production Economics of shrimp aquaculture................................................................. 19
3.7.4 Marketing structure and gross revenue ........................................................................... 19
4 RESULTS .................................................................................................................................... 19
4.1 Cash flows analysis ............................................................................................................. 19
4.2 Net Present Value (NPV) in cash flow ................................................................................ 20
4.3 Pay-back period ................................................................................................................... 20
4.4 Internal Rate of Return (IRR) in cash flow ......................................................................... 21
4.5 Break even point and break even price ................................................................................ 21
4.6 Financial ratios .................................................................................................................... 21
4.6.1 Net current ratio .............................................................................................................. 21
4.6.2 Debt service coverage ratio ............................................................................................. 21
4.7 Breakdown of expenses ....................................................................................................... 22
4.8 Risk analysis ........................................................................................................................ 23
4.8.1 Sensitivity analysis .......................................................................................................... 23
4.8.2 Scenario summary ........................................................................................................... 24
4.8.3 Results of Monte Carlo Simulation ................................................................................. 24
4.8.4 Qualitative risk analysis .................................................................................................. 26
5 DISCUSSION .............................................................................................................................. 28
6 CONCLUSION AND RECOMMENDATIONS ...................................................................... 31
ACKNOWLEDGEMENTS ............................................................................................................... 35
LIST OF REFERENCES ................................................................................................................... 36
APPENDIX .......................................................................................................................................... 41
UNU Fisheries Training Programme 2

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LIST OF FIGURES
Figure 1: Life cycle of penaeid shrimp. ..................................................................................... 7

Figure 2: World shrimp aquaculture production by region. ...................................................... 8
Figure 3: Annual shrimp aquaculture production in Sri Lanka ................................................. 9
Figure 4: Variation of export quantity and value of shrimp in Sri Lanka .................................. 9
Figure 5: Major shrimp farming areas in Chilaw - North-western province in Sri Lanka. ..... 12
Figure 6: Total and Net cash flow of the during 10 years of operation of small scale shrimp
farming. ................................................................................................................... 20
Figure 7: Accumulated Net Present Values and payback period of the during 10 years of
operation of shrimp farming. ................................................................................... 20
Figure 8: IRR (Internal Rate of Return) in cash flow. ............................................................. 21
Figure 9: Financial ratios of the small scale shrimp culture in Sri Lanka. .............................. 22
Figure 10: Financial breakdown of small scale shrimp culture in Sri Lanka. ......................... 22
Figure 11: Percentages of major variable cost items in small scale shrimp farming. .............. 23
Figure 12: Impact analysis of different variable in small scale shrimp farming ..................... 23
Figure 13: Output probability distributions of Net Present Value of different variables using
15% discount rate. .................................................................................................. 25
Figure 14: Risk analysis matrix-level of risk in shrimp aquaculture in Sri Lanka. ................. 27
Figure 15: Variations of average farm gate price/kg (>20 g) of shrimp aquaculture in Sri
Lanka...................................................................................................................... 29
Figure 16: Production, cost and revenue of semi-intensive shrimp farming systems in Asian
countries, 1994 ....................................................................................................... 30

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LIST OF TABLES
Table 1: Comparison of past and present impacts. .................................................................. 10

Table 2: Technical/financial information and assumptions used in one farm model of small
scale shrimp farming. ................................................................................................ 17
Table 3: Investment cost for small scale shrimp farming. ....................................................... 18
Table 4: Operational cost (fixed cost and variable cost) for one culture cycle........................ 18
Table 5: Production economic of small scale shrimp farming. ............................................... 19
Table 6: Sale price and quantities produced by one culture cycle ........................................... 19
Table 7: Different scenarios on equipment cost, quantity and sales price on NPV and IRR in
small scale shrimp farming. ...................................................................................... 24
Table 8: Qualitative measures of likelihood and management options. .................................. 27

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1 INTRODUCTION
Sri Lanka is an island state in the Indian Ocean, south-east of the Indian sub-continent between
latitudes 6-10° N longitudes 80-82° E. The island is approximately 65,610 km2 with a 1,760
km long coastline. The total continental shelf area is around 30,000 km2 with an average width
of approximately 25 km and extending beyond 440 km. Sri Lanka received their sovereign 200
mile Exclusive Economic Zone rights (EEZ) in 1978. The water to land ratio of 3 ha per km2
of land is considered to be one of the highest such ratio in the world (MOFE 2001).
Sri Lanka has a long history of reliance on the sea and coastal areas for nutritional and economic
development and well-being of the people. Today the fisheries and aquaculture sector of Sri
Lanka is a major source of animal protein providing around 70% to the Sri Lankan population
although the current per-capita fish and fishery products consumption level is only at 14.5
kg/year. Sri Lanka’s fisheries sector (including aquaculture) has generated 246 million US$ of
revenue from the growing export market during the year 2013 and it was 2.5% of total export
earnings (MFARD 2014).
The shrimp industry in Sri Lanka has become one of the most important sectors of fisheries
and aquaculture. Among many aquaculture initiatives so far; shrimp farming has been the most
lucrative commercial aquaculture activity and a good attraction for investment over the past
two or three decades. Currently shrimp export is one of major foreign exchange earner in
aquaculture exports of the country earning 19.4 million US$ in 2013 (MFARD 2014).
The shrimp aquaculture industry in Sri Lanka started in the early 1980s when few large
multinational companies and few medium scale entrepreneurs embarked on shrimp industry
(Drengstig, 2013). Although the industry initially emerged in the Batticaloa district on the east
coast, the industry was subsequently established in the north-western province during the 1980s.
The industry grew slowly towards the beginning of 1990 when there were a total of 60 farms
covering an area of 405ha (Siriwardena 1999).
As a result of an attractive package of incentives by the government the shrimp farming grew
rapidly. The north-western coastal belt became the hub of the shrimp farming industry of Sri
Lanka. By the end of 1999, an estimated 1,300 prawn farms covering an area of 4,500 ha and
80 hatcheries with an annual capacity of 750 million post larvae had developed in the area
(FAO 2004).
During this period 30-40 post larvae/m2 were stocked in earthen ponds and produced 8,000-
9,000 kg/ha/year (Drengstig 2013). The industry recorded its peak economic performances in
the year 2000 by earning US$ 69.4 million worth of foreign exchange for the total exported
volume of 4,855 MT. Export of farmed P. monodon accounted for almost 50% of the seafood
export sector (UNEP/GPA 2003). Moreover, shrimp farming has contributed towards the
development of support industries such as agricultural lime outlets/producers, fiberglass
manufacturers, feed outlets, machinery supply and repair facilities, hardware stores and
laboratories, cold-storage, shrimp processing, and export industry networks while providing
many rural livelihoods.
Shrimp farmers in Sri Lanka typically practice brackish-water monoculture of black tiger
prawns (Penaeus monodon). At its blooming period, shrimp farms provided approximately
40,000 employment opportunities. However, that number dropped to approximately 8,000 after

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disease outbreaks caused a larger number of farmers to abandon their ponds and unemployment
among smallholder shrimp farmers became a reality.
In 2010 there were approximately shrimp 603 farms operating along 120 km of coastline in the
north-western province, a dramatic decline of farming compared to 1999 (Munasinghe et al.
2010). Further, the majority (492) were identified as small scale farms, where the farmer was
actively involved in all activities of his fewer shrimp ponds. Compared to 1999, although the
farming area of during 2010 was 1,404.6 ha, no considerable difference was noted between the
production of 1999 and 2010 (3,820mt and 3,480mt respectively) (MFARD 2014).
However, smallholder farmers face uncertainty and instability, with farmers continuously
entering and leaving the industry. This is mainly because of lack of knowledge on profitable
operations and lack of understanding of the relevant inputs and of their relationships in the
entire production process (Brugère et al. 2007). Many of the studies (Philips 1992, Senarath
and Visvanathan 2001, Munasinghe et al. 2010, Westers 2012, Galappaththi and Berkes 2014)
focused more on the environmental, biological and management aspects rather than paying
critical attention to the financial aspects of the shrimp production in Sri Lanka.
Efficient financial management of aquaculture can make the difference between profits and
losses (Engle and Neira 2005). Therefore, it is essential to know the production costs and its
evolution and to determine the factors that affect farm profitability. That will help farmers to
manage their farms in a cost-effective way.
Such intervention will help to enhance confidence of small scale farmers to stick to shrimp
farming industry. Also careful investigation of the economics of shrimp farming would benefit
both producers and policymakers in designing appropriate policy measures enabling increase
of profitability in aquaculture (Ahmed et al. 2008). For this reason, need to have appropriate
information about things such as production by different culture systems, input costs and
availability, marketing demand, supply and prices making economic decisions on aquaculture
investments.
Though several researchers have looked into the biological and environmental aspects of
shrimp farming in Sri Lanka, very limited attention has been paid to the long term economic
sustainability. Therefore, the purpose of this study is to fill this gap and evaluate production
costs and the profitability (economic viability) of semi intensive small scale shrimp farms.
Further evaluating of farm-level profitability is necessary for implementation of sustainable
shrimp farming practices to convert of abandoned shrimp farms area in the North-western
province, for economic benefits for Sri Lanka.
1.1 Objectives
The purpose of the study was to:
1) Evaluate production costs in order to assess the profitability of semi intensive small
scale shrimp farms in North-western province of Sri Lanka.
2) Assess key risk factors that have significant impacts on farm profitability.
3) Provide recommendation with respect to economics to support the development of

sustainable shrimp farming practices in Sri Lanka.

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2 LITERATURE REVIEW
2.1 Distribution of shrimp (Penaeus monodon)
Though there are more than 3,000 shrimp species worldwide, only 40 species are in fact
commercially exploited (Whetsone et al. 2002). Shrimp farming is based on a few species,
mainly selected from penaeidae family for their good reproductive and growth potential.
The black tiger shrimp (Penaeus monodon) is the second most cultured shrimp species in the
world, after whiteleg shrimp (Litopenaeus vannamei) (FAO 2010). The P. monodon is naturally
distributed in Indo-Pacific, region including eastern coast of Africa and the Arabian peninsula,
south-east Asia, sea of Japan and northern Australia (Holthuis 1980).
2.2 Ecology and life history of P. monodon shrimp
A marine and lagoon/estuary environment are required to complete the life cycle of black tiger
shrimp (Figure 1). The life cycle of penaeid shrimp is divided into 4 stages, larvae, post-larvae,
juvenile and adult based on morphological, behavioral, feeding and habitat changes.
The young adult shrimp migrate offshore to the ocean environment where they mature, mate
and spawn. Eggs hatch after 12 - 16 hours of fertilization in nauplii larvae. The zoeae larvae,
exist as plankton and feeds on microalgae and then metamorphoses in to mysis larvae after six
days. The mysis larvae metamorphoses to post larvae within another three days which look like
juvenile and adult. They are carried by oceanic currents to estuaries where they obtain
protection and nutrition. They remain within the estuaries until they reach late juvenile/early
adult stage, which is usually a period of 4-5 months. The shrimp migrate into the open ocean
after becoming the early adult stage of development for the remainder of their life.
In aquaculture essential environmental conditions (water salinity, temperature and other water
quality parameters) are provided for each stages of shrimp life cycle. Shrimp hatcheries are
produced post larvae where they are stocked in grow out facility to grown up to a marketable
size.
Figure 1: Life cycle of penaeid shrimp (CSIRO 2011).

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2.3 Present situation of world shrimp aquaculture
As one of the most important seafood industries, world shrimp farming has undergone an
exponential expansion over the last few decades. In 2012, farmed crustaceans accounted for
9.7 percent (6.4 million tonnes) of food fish aquaculture production by volume but 22.4 percent
(US$30.9 billion) by value. In 2012 shrimp aquaculture accounted for 15% of the total value
of internationally traded fishery products (FAO 2014). During the first half of 2014, the volume
traded in the international shrimp market increased by 5-6% compared with the same time
period in 2013, mostly as a result of import growth to the US and east Asian markets (Globefish
2014).
High profitability and generation of foreign exchange have been a major reason in the global
expansion of shrimp culture, attracting both national and international private companies
(Primavera 1998). In the early 1980s, major improvements in hatchery production and feed
processing allowed rapid advances in shrimp farming techniques, making it possible to produce
dramatically increased yields (Shang et al. 1998). However, in 1991 its production had slowed
down due to viral disease outbreaks in major production countries.
Among the world leading shrimp producing nations, Thailand, Vietnam and Indonesia, are
ranked second, third and fourth respectively after China, the world’s largest (FAO 2014). There
are some important differences in marketing aspects among these leading shrimp-producing
nations. Shrimp production of China is mostly consumed domestically. Most of the shrimp
produced in Thailand, Vietnam and Indonesia, in contrast, is exported to major markets in the
U.S., Japan and the European Union (EU). Thailand is the world’s leading exporter of shrimp.
However, shrimp production practices today are associated with several environmental
degradation, disease out-breaks, excessive use of antibiotics and chemicals and volatility in
prices and quality (GOAL 2013). Lower production of farm shrimp in Asia and Latin America
recorded in 2012-2013 associate with the persistent disease problems, mainly white spot
disease and early mortality syndrome (EMS) (Figure 2).
Figure 2: World shrimp aquaculture production by region (1991-2015). FAO (2013) for
1991-2011; GOAL (2013) for 2012-2015. Note: M. rosenbergii is not included.

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2.4 Overview of the shrimp aquaculture in Sri Lanka
2.4.1 Importance of shrimp aquaculture in Sri Lanka
Shrimp culture is an attractive business in Sri Lanka. It has identified one of the most successful
growth areas of aquaculture in Sri Lanka. The shrimp aquaculture is emerging as an important
source of foreign exchange in Sri Lanka. In 2013 it produced 4,430 mt and export 1,625 mt of
the value of export is 19.4 million US$ (Figures 3 & 4). The vast majority of cultured shrimp
production comes from north-western province of the country. However, out-breaks of diseases
have caused a major threat to the sustainability of the shrimp industry. The following
production figures clearly show the boom and bust nature of the industry.
5.000
4.500
4.000
Production (Mt)
3.500
3.000
2.500
2.000
1.500
1.000
500
-
1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Year
Figure 3: Annual shrimp aquaculture production in Sri Lanka (MFARD 2014).
6000 6000
5000 5000
Export value (Rs.Mn)
Export quantity (Mt)
4000 4000
3000 3000
2000 2000
1000 1000
0 0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Year
Quantity (Mt) Value (Rs.Mn)
Figure 4: Variation of export quantity and value of shrimp in Sri Lanka. Note:
including wild capture shrimp (NAQDA 2014).

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2.4.2 Culture facility of shrimp (P. monodon) farming in Sri Lanka
The shrimp industry in Sri Lanka can be divided into following components, post-larva
production (hatchery), grow-out (shrimp farming), and shrimp processing. According to
Jayasinghe (1995) all shrimp farms in Sri Lanka are operated at semi-intensive and intensive
scale, based on major economic and technological differences. Major differences between
semi-intensive and intensive levels are in stocking density, aeration systems, farm size,
production and investment. Annual shrimp production (kg/ha) from these systems are, 6,663
for semi-intensive and 7,801 for intensive system in 1995.
A study carried out by Dahdouh-Guebas et al. (2002) before the year 2000 has categorized
three scales of production in Sri Lankan shrimp farming. Based on the classification, the
average farm area criterions for large, medium, and small-scale shrimp farms was larger than
15 hectares, between 2 and 15 hectares, and between 0.5 and 0.7 hectares, respectively. Though
during late1900s there were relatively large scale commercial operations, currently only small-
scale shrimp farms remain in the north western province area (Table 1). There are no
constructions of new farms. Munasinghe et al. (2010) reported that fifty-four percent of
farms of the Puttalam district were less than 1 hectare and 73% of farms were less than 2 ha.
Only large scale farms of > 5 ha represented 9% of farms with the remaining 18% being
between 2 and 5 ha in 2010.
Table 1: Comparison of past and present impacts (Galappaththi 2013).

Characteristics Late 90s to early 2000s Year 2012
Size of the farms Large (>10ha) /medium (2-10ha) Small scale
/small scale (<2ha)
Number of farms 1,500 - 2,000 About 600
Operating time Throughout the year Seasonally (following a crop
calendar system)
Proportion of ponds used All ponds About one-third of the total
number of ponds
Shrimp farm construction Very common Not any more (not needed)
Impact to natural resources (water Relatively high Relatively low
pollution/habitat destruction, etc.)
Semi-intensive operations practice intermediate levels of investment while investors are

generally local residents who often play an active management role in production and profit of
shrimp production system. Farm labor is recruited from members of the family or from the
immediate community nearby.
2.5 The economics of shrimp farming at the farm level
Aquaculture enterprises are usually capital intensive, requiring considerable investment with
an extended payback period. Economic considerations in selection of an appropriate
aquaculture production system include its potential for economic returns, its economic
efficiency and farmer’s access to capital (Green et al. 1995). For most farming businesses,
efficiency is measured in economic terms; that is, the amount of money spent on a farming
activity (including costs of inputs, labor, management, cost for land and capital, etc.) is
compared to the amount earned through the sale of products (Brummett 2007).
Farm profitability is always dependent on management practices and influenced by fluctuation

of market price. Poor management can lead to reduced production and lower profitability even

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when prices rise. Instability of market prices and income flows pose major hazards to
establishing early profits and ensuring long term viability of the farm. Lack of good
assessments of the industry can cause some producers to struggle to survive under fluctuating
market conditions (Neiland et al. 2001).
Good investment appraisal with sensitivity analysis provides a future values of the most
important factors (farm gate price, feed price etc.) would allow a realistic assessment of
performance of the investment under fluctuating conditions (Griffin 1995). Thus, successful
management of technical and financial measures is a key factor of profitable operations
(Nandlal and Pickering 2004). Production costs data help the farmers in decision making and
in adjusting to changes and determining the price level under which the product cannot be sold
without losses.
Negative net present value (NPV) resulted when a drop in the shrimp price by 15% and the
cost of production raises by 15% simultaneously in semi-intensive farming in west Bengal, east
coast of India (Bhattacharya 2009). The sensitivity analysis indicates that under the uncertain
scenario of international market price traditional shrimp farming system remains more
economically viable than semi-intensive farming. In Philippines (Primavera 1991) finds that if
the price of shrimp decreases by 20%, intensive farming, extensive farming and traditional
farming fail to remain profitable with negative net present value. Only semi-intensive farming
was found to be profitable in that case.
Sathiadhas et al. (2009) reported the break-even point and profitability of aquaculture farming
in India. The results showed that break-even price for black tiger shrimp in semi-intensive and
extensive culture is worked out at US$ 3.35/kg and US$ 2.62/kg, while market sales price is
US$ 7.29 to US$ 8.33/kg. The break-even price of white shrimp culture worked out to
US$ 3.46/kg and US$ 1.8/kg in semi-intensive and improved extensive culture, respectively.
Results of comparison study by Primavera (1993) in three management systems, extensive,

semi intensive and intensive shrimp pond culture in Philippines indicates that effect of price
changes on the profitability is much higher for intensive farms. Break-even price for extensive
(US$ 1.83/kg), semi intensive (US$ 2.72/kg) and intensive (US$ 3.4/kg) in Indonesia suggests
that the market risks of intensive farming are considerably higher.
Production costs per kilogram of shrimp were highest in intensive family and commercial farms
(US$ 2.7) followed by semi-intensive (US$ 2.1) and poly-culture (US$ 1.05) shrimp farming
in China (Cao 2012). Intensive family and commercial farms had similar profits, the highest of
all systems (around US$ 9,500 ha-1 crop-1), while semi-intensive farms obtained about half of
that level of profit. This was due to high yields and better market price of intensive farming.
Gonzalez-Romero et al. (2014) used a bio-economic model to define optimum pond size for
commercial intensive production of the whiteleg shrimp L. vannamei. They concluded that
ponds covering 2 ha are optimal based on maximum NPV (US$ 63,300), 10% interest rate and
IRR (25%).
Though the net present value (NPV) and the internal rate of return (IRR) of ten years farming
of P. vannamei is US$ 232,000 and 15.1%, and thus very profitable, small changes in stocking
density, survival rates and price can result in large losses (Sureshwaran et al. 1994).

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Valderrama and Engle (2001) was analyzed the profitability of shrimp farming (farm size 10
to over 400 ha) in Honduras under various risk conditions. The effect of risk on profitability
was evaluated through Monte Carlo simulation. In this study feed prices and production were
correlated with other variables such as total seed costs, feed quantity, total full-time labor, total
diesel costs, debt payment, and infrastructure depreciation. Scenario analysis were defined in
order to identify possible differences in management strategies to minimize the impact of
operation failures. The results indicate that risk is more associated with low yields than high
production costs. All farms, regardless of size, need annual shrimp production of more than
450 kg/ha to avoid losses.
3 METHODOLOGY
3.1 Sampling site description
The major source of data for the study was obtained from the three small scale shrimp farms
which are located in around latitudes 7° 31' N, longitudes 79° 48' E Ambakandawila, Chilaw
within the Puttalam district in North-Western province in Sri Lanka (Figure 5).
Figure 5: Major shrimp farming areas in Chilaw - North-Western province in Sri Lanka.
3.2 Data collection
Data were collected over 20 week period from month of April to end of August 2014. Data
collection methods of the study were, a) participant observations of operating activities in farms
b) farmer interview and c) information from farm record keeping books.
For economic analysis, investment cost, production cost and return, data on yield and technical
information of farming was used for clarify production cost and assess the profitability and
feasibility of a shrimp farm investment.
Total initial investment for the present small scale shrimp farming includes cost for land,
building, fencing and equipment. Total production costs are the sum of annual fixed cost and
operational/variable cost. Variable costs are directly related to the scale of farm operations at

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given time period. Variable costs in production are cost of feed, post larvae, chemicals,
electricity, transport and cost for labor, etc. Fixed costs include cost for license/reports, pond
renovation, salaries of labors and consultants. Further, total production and sales price were
used to calculate gross revenue.
3.3 Analytical technique
In order to assess the profitability of the operation of a shrimp aquaculture farm over 10 years,
a model was developed by using Microsoft Excel. Data from a single farm was used as a base
case for simulation the model. The model simulates the annual activities of a farm including
production, finance, cash flow, capital replacement and depreciation, income taxes, balance
sheet and profitability measures. The model also facilitates a risk analysis. The theoretical
foundation of the profitability model and the formulas are described in the next section.
3.4 Profitability model of shrimp farming
Economic analysis can provide a systematic evaluation of aquaculture operations, which lead
to better management strategies towards economic sustainability. Economic sustainability of
any farming system is examined by its profitability based on cost and benefit analysis. Profit is
defined as the difference between the total revenue and total cost. While profit is the base for
any economic activity, economic analysis provides the basic foundation for decision making.
In aquaculture models different disciplines are used to identify important variables and their
relationships by creating formulas (Cloete 2009). A profitability model is defined as a
simulation model of an initial investment and subsequent operations. Simulation models have
been used to evaluate economic feasibility (Zuniga 2009) and optimize system design and
operations in aquaculture (Leung 1986). Profitability models can also be used as a tool for:
• Assessing the cost factors associated with production

• To assess the effects of changes in investment, operational costs in various farming
systems and market prices on farming profitability and decision making
• Cost-benefit analysis of research and development options
• Providing an economic decision tools for researchers and stakeholders in farming.
3.5 Measures of profitability
3.5.1 Viability of investments
The profitability of investment of small scale shrimp farming will be estimated by measuring
of Net Present Value (NPV), Internal Rate of Return (IRR), Payback period (PBP) and Break-
even point (BEP) (Engle 2010; Bhattacharya 2009). The rate used to calculate the present value
is known as the discount rate (basically opportunity cost of funds plus a risk addition).
Net Present Value (NPV)
Net Present Value is used on discounted cash flows to evaluate capital investment and to give
an indication of the present value of future earnings. Essentially, net present value measures the
total amount of gains and losses a project will produce compared to the amount that could be
earned simply by saving the money in a bank or investing it in some other opportunity that
generates a return equal to the discount rate. Investments with a positive NPV would be

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accepted; those with a negative NPV rejected, and a zero value makes the investor indifferent.
The NPV value can be calculated by using the formula below (Benninga 2008).
Where, - C0 = Initial investment, Ci = Cash flow, r = Discount rate, T= Planning horizon
Internal Rate of Return (IRR)
The discount rate at which the project has an NPV of zero is called the internal rate of return
or IRR (De Ionno 2006; Benninga 2008; Engle 2010). The IRR represents the maximum rate
of interest that could be paid on all capital invested or the discount rate at which the annual
return becomes zero, or the farm breaks even. In other words, the IRR represents the interest
rate at which capital could be borrowed for the farm, or the interest that could be earned on
capital (opportunity cost) (Siar at al. 2002).
The algorithms available in the Excel software are used for calculating NPV and IRR . These
two measures are calculated for the following cash flow series in model:
1. Total capital invested and cash flow after taxes

2. Equity and free (Net) cash flow
Payback period (PBP)
Payback period is the number of years required to recover the amount of the initial investment
from the net cash flow, resulting from the investment. In other hand it is the time required for
the cumulative NPV to become greater than zero and remain greater than zero over the rest of
the life of the project. The payback period is expressed as number of years, not as a cash amount.
It can be used to quickly identify investments with the most immediate cash returns.
Aquaculture investments are preferred with the shortest payback period (Engle 2010) other
factors being equal because of risk considerations.
Break-even point (BEP)
Break-even point is the level of production at which the total cost and total revenue are equal
(Curtis and Howard 1993), hence no profit is made and no losses are incurred. It can also be
defined as the point where the net profit is zero. The selling price, fixed costs or operating costs
will not remain constant resulting in a change in the break-even point. Hence, these should be
calculated on a regular basis to reflect changes in costs and prices and in order to maintain
profitability.
The break-even price can be compared to the cost of production of a single unit of production.
Profit is generated when break-even price is higher than the cost of production. Break-even
production and break-even price offer additional insights in to the overall feasibility of the
farming (Engle and Neira 2005).
Break-even production and breakeven selling price were calculated as follows:
Break-even production = (Fixed cost + Annuity of investment) / (Farm-gate price per unit –

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Variable cost per unit production)
Break even sales price = Fixed cost per unit production + Variable cost per unit production
3.5.2 Financial ratios
Sustainable farming business requires effective planning and financial management. Financial
ratios are a useful management tool and key indicators of understanding of farm performance.
The most commonly used financial ratios are return on equity, return on investment, net current
ratio and debt service coverage ratio.
Net Current Ratio (NCR)
The net current ratio is a liquidity ratio. A higher current ratio indicates the higher capability
of a farm to pay back immediately its liabilities. The ratio 1.5 is mostly sufficient. The formula
used for calculating current ratio is:
Net Current Ratio: Current assets / Current liabilities
Debt service coverage (DSCR)
Debt service coverage is the ratio of cash available for debt servicing, i.e. to pay annual loan
interest and loan repayments (Engle 2010). It can be used as a useful indicator of financial
strength of the farm. Usually a debt service coverage ratio of 1.5 to 2.0 is considered as
acceptable. If below 1.0 it indicates that there is not enough cash flow to cover loan repayments
and loan interest.
Debt service coverage: (Cash flow after tax) / (Principal repayment + Interest payments)
3.6 Risk analysis
Risk analysis typically seeks to answer four questions:

• What can go wrong?
• How likely is it to go wrong?
• What would be the consequences of its going wrong?
• What can be done to reduce either the likelihood or the consequences of its going
wrong? (Arthur et al. 2004).
All businesses operate in environments loaded with risk. These include environmental,
biological, operational, financial and social risks. Therefore, it is important to evaluate the risks
associated with a business before investing in it (Cloete 2009). In Sri Lanka shrimp aquaculture
is considered a high risk business, as it involves relatively high operational cost and uncertainty
of shrimp survival during the culture period. Risk is associated with the natural variation in
factors affecting profitability over time (Okechi 2004).
Risk analysis provides measures of uncertainty with respect to changes in input variables, such
as variable and fixed cost, initial investment cost, production, sales price and interest rates.
Therefore, it is significant to identify risk early on in the farming and develop an appropriate
risk response plan. There are mainly three techniques used for assessing risks of investments:

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Sensitivity Analysis, Scenario Analysis and Monte Carlo Simulations (Brigham and Houston
2004).
3.6.1 Sensitivity analysis
Sensitivity analysis is used to see the effect of changes in one input variable (for example fixed
cost, variable cost, equipment cost, production quantity or sales price,) at a time on the
profitability of the production. It also identifies the areas where an improvement in performance
may have a positive impact on economic performance (Losordo and Westerman 1994).
3.6.2 Scenario analysis
The scenario analysis evaluates the impact of changes in input of more than one variable at the
same time looking at for example the optimistic, pessimistic and very pessimistic conditions.
3.6.3 Monte Carlo simulation
Monte Carlo simulation is the most advanced tool for risk assessment. Monte Carlo simulation
techniques were used to generate values for individual cost and quantity parameters based on
the probability distributions. It is used to specify a probability distribution of the outcome as a
function of each of the uncertain input factors. The risk is then the probability of a negative
outcome (negative NPV).
3.6.4 Qualitative risk analysis
The qualitative risk analysis was used to assessment of the impact of the identified risk factors.
The risk matrix ranks probability of risk depending on the impact they could occur and in case
of risk occurring of non-numerical ranges such as low, moderate, high and extreme high.
Probability of occurrence and impact level of a risk matrix was developed in order to better
understand the risk exposure. These include of environmental risks (e.g. severe weather events,
poor water quality), biological risks (disease, lower growth rates, seed quality, predation etc.),
operational risks (equipment failure, sharing of equipment, use of chemicals and supplementary
feed), financial risks (e.g. sales price changes, currency fluctuations, escalating taxes and
interest rates, decreasing market demand, access to credit, increasing production cost) and
social risks (lack of skilled manpower, pouching, competition from other sectors). Information
for analysis were gathered from reports, case studies, news articles, published research,
onsite/field visit and farmers themselves.
3.7 Assumptions
For economic analysis, data on yield, cost and return of farming used for clarify production
cost, assess the profitability and feasibility of an investment. Total production costs included
the sum of annual fixed cost and operational/variable cost. Variable costs are directly related
to the scale of farm operations at given time period. Variable costs in production are cost of
feed, post larvae, chemicals, transport and cost for labor, etc.
The costs and benefits were calculated on per farm basis (6,500 m2) and all the inputs and
output related to current study are based on price at the 2014 and US dollars (US$) exchange
rate is 130 Rs/US$. The financing of the small scale shrimp farm was assumed to be 40% equity
and a loan of 60% of the total investment required, at 11% interest rate, charge and management

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fee for loans is set at 2% and loan to be paid back over 10 years. Depreciation was calculated
using the straight-line method (equal depreciation costs per annum over the asset’s life).
Depreciation on buildings was assumed to be 4% each year, equipment by 10% and other
investment by 20%. The average accounts receivable from debtors were assumed to be 20% of
revenue and accounts payable for creditors were assumed to be 15% of variable costs.
Dividends to shareholders are expected to be 10% of profit after income tax which is 8%. We
assumed a 15% of discount rate for study (Table 2). Culture period is 4 months and usually two
culture cycles were operated during the year.
Table 2: Technical/financial information and assumptions used in one farm model of

small scale shrimp farming.
Value
Technical Information
Land area (ha) 1.0
Culture pond area (m2) 6,500
Average pond depth (m) 1.0
FCR 1.3
Stocking Density (PL/m2) 21
Survival Rate (%) 63
Culture period (months) 4
Culture cycles/year 2
Initial weight of fingerling stocked (g) 0.01
Initial number of fingerling 140,000
Final harvest weight of individual shrimp (g) 27
Financial information
Loan 60%
Equity 40%
Loan interest 11%
Loan repayments 10 years
Loan Management fees 2%
Assumptions
Dividend 10%*
Debtors (account received) 20%*
Creditors (Account payable) 15%*
Depreciation of buildings 4%*
Depreciation of equipment 10%*
Depreciation of others 20%*
Discounting rate 15%*
Income tax 8%
Planning horizon (years) 10
*Assumed by author
Exchange rate: 1 US$ = 130 Rs.
3.7.1 Initial investment requirement
Shrimp aquaculture businesses require high levels of capital investment. Total initial
investment for the present small scale shrimp farming was 27,000 US$ (farm log book). Of the
total, 17,700 US$ was for purchasing land (1 ha), including already constructed earthen ponds,
because the entire analysis is based on the utilization of an abandoned shrimp farm. There were
three ponds extent in one ha of land area, two ponds were used for farming and other was used
as sedimentation/stock pond. Other investments were 1,600 US$ for permanent building, 3,350
US$ for fencing and 4,350 US$ for equipment (Table 3). The total capital requirement for
initial operation is somewhat higher than total investment and the difference is called working

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capital. It is the amount of money that necessary to operating the farm until the first sales of
shrimp. The total working capital value for present study was US$ 1,000 (Appendix 2).
Table 3: Investment cost for small scale shrimp farming.

Investment Cost (US$)
Total Cost (US$)
Investment for land + ponds 17,700
Buildings 1,600
Fencing 3,350
Cost of equipment
Refrigerator 465
Generator 921
Water pump 500
Paddle wheel 2,464
Total 27,000
3.7.2 Total cost/Operational cost
Operating costs are the expenses which are related to the operation of a farm, including fixed
cost and variable cost (Table 4). The variable cost for the single culture cycle of operation was
US$ 10,264 for production of 2,350 kg per culture cycle or US$ 4.37 per/kg of shrimp. There
were two culture cycles per year, so variable cost per year is estimated as US$ 20,528 and total
production per year was 4,700 kg. Fixed cost is estimated at US$ 2,536 per single culture cycle
and US$ 5,012 per year. The total cost of operations for one year period is valued at US$ 25,540.
Table 4: Operational cost (fixed cost and variable cost) for one culture cycle
Total/Operational cost (US$) for one culture cycle

Number of units Unit cost (US$) Total cost(US$)
Fixed Cost
License/reports (Year) 3 20 60
Labor charges (2×4 months) 8 155 1,240
Consultant fees (per month) 4 154 616
Pond renovation 2 310 620
Total Fixed Cost 2,536
Variable Cost
Post Larvae 140,000 0.01 969
Feed:
Commercial feed 2,850 1.73 4,931
Supplementary feed 480 1.4 672
Electricity 9,150 0.12 1,102
Chemicals
Lime 4000 0.08 338.46
Dolomite 7000 0.19 1346.15
Other 315.39
Transport cost (fingerlings) 40
Fuel 200
Harvesting charges 300
Other (telephone, etc…) 50
Total Variable Cost 10,264
TOTAL COST 12,800

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3.7.3 Production Economics of shrimp aquaculture
Total production for the 6,500 m2 water area was 2,350 kg of shrimp after one production cycle
which is 4 month of culture period (Table 5). There are two production cycles per year, total
annual shrimp production at this rate was 4,700 kg or 7,230 kg/ha/year. The stocking density
is 21 post-larvae per m2, average survival rate was 63 percent, while initial average weight of
post larvae 0.01 g and end of the culture cycle, average size of the harvested shrimp was around
27.0 g. Feed conversation ratio (FCR) was 1.3.
Table 5: Production economic of small scale shrimp farming.

Month Average weight (g) Number of shrimp Total weight (kg) Survival rate (%)
0 0.01 140,000 1.4 100
1 4.5 112,000 504 80
2 13.6 98,000 1,333 70
3 19 90,000 1,710 64
4 26.6 88,200 2,350 63
3.7.4 Marketing structure and gross revenue
The range of sales price for the marketing varies with size of shrimps being produced by the
farm. There are also differences in the markets supplied, domestic versus export. The gross
revenue for one culture cycle was calculated by multiplying the total amount of production
(2,350 kg) by its sales price (US$ 8.31) (Table 6). Gross revenue of net profit was calculated
as the difference between gross revenue from shrimp sale and total cost of production including
fixed cost and variable costs, depreciation, taxes, etc.).
Table 6: Sale price and quantities produced by one culture cycle
Number of units (kg) Sales price (US$) Gross revenue (US$)

Total production 2,350 8.31 19,528
4 RESULTS
4.1 Cash flows analysis
Figure 6 shows the total and net cash flow during ten year period of small scale shrimp farming.
Because of the high initial investment cost, both total and net cash flow are negative during the
first year of study. Nevertheless, in the remaining years, both total and net cash flow are
positive and continues on trend throughout the ten years planning horizon. In 2014, equity
value in the cash flow series is US$ 11,200, which is 40% of total financing in shrimp farm
operation. At the end of the ten years, the sum over the 10 years of the total and net cash flow
is US$ 95,176 and US$ 84,093 respectively (Appendix 8).

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15.000
10.000
5.000
0
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
-5.000
US$
-10.000 Year
-15.000
-20.000 Total Cash Flow & Capital
Net Cash Flow & Equity
-25.000
-30.000
Figure 6: Total and Net cash flow of the during 10 years of operation of small scale shrimp
farming.
4.2 Net Present Value (NPV) in cash flow
The assessment of economic viability is done by calculating the viability measures like Net
Present Value (NPV) and Internal Rate of Return (IRR). Assuming that the discounting rate
(MARR) of this study is 15%, the Net Present Value (NPV) at the end 10 years was found to
be US$ 33,003 for the total capital invested and US$ 34,993 for the equity. Based on Figure 7
it was observed that the first three years the accumulated NPV of total cash flow is negative.
4.3 Pay-back period
According to the Figure 7, the pay-back period for total capital investment is 3 years. It means
that this venture needs three years to recover the original investment. The higher NPV value
and relatively short pay-back period in present study indicates that investment is highly
profitable.
40.000
30.000
20.000
10.000
US$
0
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
10.000
Year
20.000
30.000
40.000
NPV Total Cash Flow 15% NPV Net Cash Flow 15%
Figure 7: Accumulated Net Present Values and payback period of the during 10 years of
operation of shrimp farming.

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4.4 Internal Rate of Return (IRR) in cash flow
Internal Rate of Return for the total capital investment is 41% and 74% for the equity in the
present study. The IRR is higher than the 15% MARR for present study, indicating that
investment is attractive and profitable (Figure 8).
80%
70%
60%
Percentage
50%
40%
30%
20%
10%
0%
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Year
IRR Total Cash Flow IRR Net Cash Flow
Figure 8: IRR (Internal Rate of Return) in cash flow.
4.5 Break even point and break even price
Variable cost per unit production is US$ 4.37/kg and annuity of the investment is US$
4,754/year. Based on annual fixed cost (US$ 5,012) the break-even production and breack-
even price for the black tiger shrimp in semi intensive system is 2,479 kg per year and US$
6.45 respectively.
4.6 Financial ratios
In following includes the results of financial rations based on calculation of the initial setup
values.
4.6.1 Net current ratio
Net current ratio is above one which indicates that current assets are greater than current
liabilities. At the beginning of the farming the assets values are 2.4 times the liabilities values,
at the end of the ten year it was 13.6 times the liabilities values. It indicates the higher capability
of a farm to pay back immediate its liabilities (Figure 9).
4.6.2 Debt service coverage ratio
A debit service coverage ratio of greater than one indicates that farm has enough cash to pay
interest and repayments loans. (Figure 9). In the first year it was 4.7 and end of the ten year 6.1
value indicates that high financial strength of the farm.

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16
14 Net Current Ratio: (Current

asset/Current liability)
12 Debt Service Coverage: (Cash flow
10 after tax/Interest-LMF+repayment)
Accepatable Minimum
Ratio
0
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Year
Figure 9: Financial ratios of the small scale shrimp culture in Sri Lanka.
4.7 Breakdown of expenses
Breakdown of expenses show that out of the total operational cost nearly 68% of expenses are
variable cost followed by fixed cost which are 17% of total cost (Figure 10). Feed cost represent
55% or more than a half of the variable costs, and it was 44% of total operational cost. Feed
cost must be considered as most important items for the variable cost in semi-intensive systems
followed by 19% and 11% of chemicals and electricity cost respectively (Figure 11).
Fixed cost for year - round shrimp farming was US$ 5,012 of which management cost including
labor salaries constitutes about 49% and 25% of consultant fees. License fees, renovation of
pond and canal digging contributed about another 26% of total cost.
Repayments
Financial Costs 5% Paid Divident
4%
3%
Paid Taxes
3%
Fixed Cost
17%
Variable Costs
68%
Figure 10: Financial breakdown of small scale shrimp culture in Sri Lanka.

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Other
Harvesting charges
Fuel
Expenses
Transport cost
Chemicals/Lime/Dolamite
Electricity
Feed:
Post Larvae
0 10 20 30 40 50 60
Percentage
Figure 11: Percentages of major variable cost items in small scale shrimp farming.
4.8 Risk analysis
In shrimp farming, higher intensity is accumulated with the higher financial risk. In more
intensive systems, the probability of loss are likely to be higher. World Bank (2000) reported
that financial risk in shrimp farming comes from four sources. They are input factors
(availability of brood stock, price of post larvae, water quality, credit, etc.); output factors (sales
price, production supply to the market, etc.); design factors (site selection, etc.) and natural
factors (disease, floods, typhoons, etc.).
4.8.1 Sensitivity analysis
Sensitivity analysis was done for major investment costs including cost of equipment, fixed
and variable cost and further sales quantity and sales price. The results of the impact analysis
showed that the profitability of the small scale shrimp farm production is most sensitive to
variations in the sales price. When the value of the sales price falls by 20% or more, negative
NPV in cash flow is no longer profitable and it might destroy the economic viability of the
shrimp farm (Figure12). Though variation in the cost of equipment and operational cost (fixed
and variable) did not have a significant impact on the farm profitability, variation in variable
cost had more impact on the NPV of equity than cost of equipment and fixed costs (Appendix
9).
140.000
120.000
100.000
80.000
NPV for Equity
60.000
40.000
20.000
0
-50% -40% -30% -20% -10%
-20.000 0% 10% 20% 30% 40% 50%
-40.000
-60.000
-80.000
Deviations
Equipment Sales Quantity Sales Price
Variable cost Fixed cost
Figure 12: Impact analysis of different variable in small scale shrimp farming.

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4.8.2 Scenario summary
Three variable parameters, i.e. cost of equipment, sales quantity and sales price were used for
scenario analysis. In pessimistic condition, value of equipment cost increased by 30% and sales
quantity decreased by 10%, as well as sales price decreasing by 20% simultaneously, the
farming is no longer profitable. Table 7 shows in resulted negative NPV (-592) and IRR (13%)
which was less than minimum acceptable rate of return (MARR) of 15%.
Table 7: Different scenarios on equipment cost, quantity and sales price on NPV and IRR in
small scale shrimp farming.
Sce na rio Summa ry
Cha nging Ce lls:

Equipment 100% 80% 130% 150%
Quantity 100% 110% 90% 80%
Sales Price 100% 120% 80% 70%
R e sult Ce lls:
NPV Equity 34,993 76,026 -592 -18,921
IRR Equity 74% 120% 13% 0%
4.8.3 Results of Monte Carlo Simulation
Figure 13 illustrates the risk that resulted from the Monte Carlo simulation analysis. It shows
the probability of obtaining negative values of NPV assuming uncertainties in sales price, sales
quantity, cost of equipment, variable cost and fixed cost after ten years. In the Monte Carlo
method 100 random points of uniform distributions were generated within the define range
(0.5-1.5 or from 50% lower up to 50% higher values of input parameters), this was used to
represent the five uncertain economic parameters. It should be noted that in the case of say
sales price this range is very wide, so the simulation will show very conservative results.
Among the risk factors studied, the most critical factor affecting economic performance is the
sales price. It has a frequency of 28% of receiving negative NPV, followed by sales quantity
(6%) and variable cost (5%).

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(a) (b)
12 12
10 10
8 8
Frequency
Frequency
6 6
4 4
2 2
0 0
NPV NPV
(c) (d)
20 12
18
16 10
14
8
Frequency
Frequency
12
10 6
8
6 4
4
2
2
0 0
NPV NPV
(e)
30
25
20
Frequency
15
10
5
0
NPV
Figure 13: Output probability distributions of Net Present Value of different variables
using 15% discount rate. The negative NPV (< 0) are indicate certainty of achieving risk.
(a) Sales price (b) Sales quantity (c) Cost of equipment (d) Variable cost and (e) Fixed
cost.

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4.8.4 Qualitative risk analysis
Qualitative risk assessment of Figure 14 indicates general risk factors for shrimp aquaculture,
including financial, biological, environmental, operational and social risks. The risks vary in
their spatial extent and in the timing of presence. Some risks factors are always present,
whereas others may only occur at specific times.
A greater number of high potential and extreme risks were associated with disease, low
production and deterioration of water quality. Shrimp farmers in the North-Western province
have dealt with disease problem, which cause lower shrimp yield and result in lower incomes
since the 1990s. Thus, many of the farmers who implemented less sustainable practices may
have left the industry. The increasing of production cost of different variables had significant
financial impact at varying degrees. Government policies including imposing tax incentives,
interest rates and environmental policies likely to change and contribute to risk that are
moderately effect to the financial status of farming.
There is low probability that flood conditions can be expected to in all the farming areas
simultaneously. This situation occurs in general once in 4 to 5 years (UNEP/GPA 2003).
Munasinghe et al. (2010) reported that during the late dry period from August to September,
the salinity levels exceeded 50 ppt which is higher than salinity for optimal shrimp growth in
brackish water around the Puttalam district. Although these natural hazards have not occurred
frequently. They could have a high impact on profitability.
The little cormorant is a troublesome predator excluding carnivorous fish that can grow in
shrimp ponds. Farmers complained that they were robbed of shrimp at night during the later
stage of the crop. It was frequently happening and this could lower and moderately threaten the
viability of its operations respectively.
Likelihood is described as the probability of an event occurring, ranging from rare events to
likely, most likely or frequent events. The qualitative likelihood descriptors used in a risk
assessment is presented in Table 8.

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Extreme High
Probability of Risk
High
Moderate
Low
Low Moderate High Extreme High

Impact
Disease spread
Biological Decreasing growth rate
Seed stock low quality or limited availability
Predation
Decreasing sales price (<Break even price)
Increasing production cost-equipments
Increasing production cost-feed
Increasing production cost-electricity
Increasing production cost-seed
Financial Increasing production cost-chemicals
Low production quantity
Limited market access
Decreasing market demand (size and quality)
Credit instability
Escalating interest rates/taxes
Limited availability of quality feed
Operational Use of animal products as supplement to feed
Sharing of equipments
Equipment failure
Use of chemicals/Antibiotics
Environmental Deterioration of water source
Natural hazards (flood/drought)
Pouching
Social Lack/loss of skilled labor
Conflicts with other land and resource users
Trade restrictions
Figure 14: Risk analysis matrix-level of risk in shrimp aquaculture in Sri Lanka.
Table 8: Qualitative measures of likelihood and management options.

Consequence Probability criteria Effect Measures require
Low Very low, may occur in Low risk Necessary to maintain
exceptional circumstances assurance level
Moderate Likely to occur at some time Moderate financial lost Tolerate, if cost reduction is
acceptable
High High, probably occur in most Significant financial lost Appropriate additional control
circumstances measures are needed
Extreme Expected to occur in most An unacceptable Require immediately action
high circumstances financial loss

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5 DISCUSSION
Aquaculture is a business. The purpose of a business is to generate profit. Profitability is not
the same as productivity, as it is also subjected to economic factors such as production costs
and market price (Yu et al. 2006). The investors will not only need to practice responsible
aquaculture but also need to make a profit to maintain sustainable aquaculture (Mwangi 2007).
Results of the present study had positive values of NPV, which indicates the economic viability
of shrimp farming. It was also shown that IRR was above a minimum attractive rate of return
(MARR), and debt service coverage ratio was above 1.5 showing that cash flow of the farm
was well above the repayment of loan and its interest. Therefore, the facts above indicate that
small scale shrimp farming in Sri Lanka is a profitable activity. Nevertheless, there is no reason
to conclude that higher mean value of NPV and IRR are accompanied by lower risk. The long
term success of individual farms or industry depends on better management practices. Cao
(2012) ranks the major problems that might significantly affect farm profitability in China. The
top five problems were: disease outbreak, low farm-gate price, poor seed quality, high feed
price and poor water quality.
The ponds size ranging from 0.16-1.0 ha were optimal for efficient management of intensive
cultivation of P. monodon in Thailand and Taiwan (Kongkeo 1997). Monitoring of water
quality and shrimp population and feeding is much easier in small ponds compared to larger
ones. Wind action on small ponds is more effective mixing of water (Brune and Drapcho 1991).
When shrimp prices are low, or pollution or disease problem occur, small scale farmers can
stop their operation for a while, or can reduce stocking density without too much financial
effect. 54% of shrimp farms in Puttalam district were less than 1 hectare and 73% of farms
were less than two ha (Munasinghe et al. 2010). Therefore, small scale farmers get more
advantages on management by using small farming area (<1ha).
Decline in world shrimp price is one of the key issues facing shrimp producers. International
market demand and prices are clearly factors outside the influence of any shrimp producing
country. Funge-Smith and Aeron-Thomas (1995) performed a sensitivity analysis on Thai
shrimp farming and found that shrimp price has the most significant effect on overall
profitability followed by production and feed price. There are 10% reduction in sales price
changing profitability by 73% in his study and it was reduction of NPV by 50% of present
study. Shrimp production was the second most important factor and 10% reduction affecting
profit by 47% and it was 24% of NPV in present study.
Shrimp prices vary with average size and quality differences, fluctuation of exchange rate,
export policies, strength of the economy, consumer preferences (Engle 2010) and supply-
demand interactions in the international market at the moment of harvest (Valderrama and
Engle 2001). The prices fall when world supply expands faster than world demand, and costs
rise as demand for inputs is expanding (Chong 1992). The usual target weight of shrimp is 30g
within 4 month of culture period in Sri Lanka. The production of large (>30 g) head-on healthy
shrimp that are properly handled and processed after harvest has great demand in the world
market. Figure 15 illustrates that variation of farm gate price (Rs) continually increasing last 6
years. It also shows that farm gate price in US$ declined in 2012-2013 due to variation of
exchange rate. According to the history of sales prices during the past 6-7 years, shrimp farmers
have gradually been receiving more favorable sales prices.

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10,00 1200
1100
8,00 1000
900
800
6,00 700
US$
600
Rs.
4,00 500
400
300
2,00 200
100
0,00 0
2008 2009 2010 2011 2012 2013 2014
Year
Farm gate price (Rs) Farm gate price (US$)
Figure 15: Variations of average farm gate price/kg (>20 g) of shrimp aquaculture in Sri
Lanka (King’s Aqua services Pvt (Ltd), Sri Lanka).
Shang et al. (1998) review the economics of hatchery and grow out of extensive, semi-intensive
and intensive phases of shrimp farming in Asia based on the results of a farm survey conducted
by the Asian Development Bank (ADB) and Network of Aquaculture Centers in Asia-Pacific
(NACA) in 1994-1995. The results can be seen in Figure 16 and Appendix 10. The survey
indicated that production cost per kg was US$ 4.56 in Sri Lanka which is less than the present
value (US$ 6.45) in 2014. It was higher than other Asian countries from China (US$ 2.27),
Vietnam (US$ 3.3), Indonesia (US$ 3.78) and Philippines (US$ 4.0), but lower than Malaysia
(US$ 5.5) and India (US$ 5.96) in 1994. For semi intensive grow out systems Indonesia had
the highest profit (US$ 3.05/kg), followed by Sri Lanka (US$ 3.00/kg), the Philippines (US$
2.54) and Vietnam (US$ 2.29). The relatively high food conversion ratio (1.9) compared to
Indonesia (1.4) is the major factor responsible for higher production cost in Sri Lanka.
Nevertheless Sri Lanka has decreased profit (US$/kg) from US$ 3.0 in 1994 to US$ 1.86 in
2014, while sales price has increased from 7.56 to 8.3 US$/kg (ADB/NACA 1996). Seed is the
second most significant variable cost (19%) in 1994, however it was 9% in the present study.
However cost of chemicals has significantly been increased when compared with in 1994.
Fallowing (Shang et al. 1998) the ponds after each harvest usually reduces the cost of
chemicals.
In 1994 stocking of 29 PL/m2 resulted in a total production of 5,040 kg/ha/year. It was 7,230
kg/ha/year in the present study indicating that small scale farmers are more efficient in the
utilization of inputs. Sri Lanka exhibited a lower profit of US$ 1.14 per kg, due to increases of
production cost during the period of 1994 to 2014. In 1994, Sri Lanka farmers enjoyed
relatively high farm gate prices compared with other Asian countries. While production costs
have continually risen in recent years, the lower export price and reasonable local market price
caused many farmers to sell their harvest to the local market, where they can received an
equivalent price for smaller shrimps (Munasinghe et al. 2010). Applying the resource cost ratio
(RCR) approach to the Asian shrimp farming industry, Shang et al. (1998) indicated that
Thailand, Indonesia and Sri Lanka had a comparative advantage in producing and exporting
shrimp to markets like Japan and/or US countries.

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6.000 8
7
Production (kg/ha/year)
5.000
6
4.000
5
US$
3.000 4
3
2.000
2
1.000
1
0 0
Indonesia Philippines Malaysia Vietnam India Sri Lanka China
Country
Production (kg/ha/year) Total cost (US$/kg)
Farm gate price (US$) Profit (US$/kg)
Figure 16: Production, cost and revenue of semi-intensive shrimp farming systems in Asian
countries, 1994 (ADB/NACA 1996).
The resent survey by Son et al. (2010) examined the production and economic efficiencies of
eighty black tiger prawn farms in the Mekong delta, Vietnam. He revealed that stocking of 17
PL m2 with a survival rate of 55% resulted in an average yield of 2,470 kg/ha/crop, final
weight of shrimp was 25g, farm gate price 5.7 US$/kg and the net income received was 6,768
US$ ha/crop (US$ 2.3/kg) after 150 culture days. Average production cost amounted to 3.4
US$/kg, and feed, the largest operating cost item accounted for 58% of the production cost.
The total production cost of 3.4 US$/kg is lower than those reported (US$ 6.45/kg) in present
study of Sri Lanka. This lower production cost was resulted due to low labor costs and land
rentals as well as low capital investment in the family-operated prawn farms in Vietnam.
Nevertheless total production (3,615 kg/ha/crop) is higher than compared with relatively
short culture period (120 days) of the present study. The poor weight gains resulted in
lengthening the crop period, increasing costs and further lowering the production and profit
margin in Vietnam. Relatively higher survival rate and growth rate of a short period of time
resulted in higher production and average individual weight (27 g) of harvested shrimp in Sri
Lanka. However, initial investment costs and depreciation values were not evaluated in the
study of Vietnam.
Shrimp farming has created various socio-economic and environmental problems in many
countries and sustainability is a major concern and remains a challenge of the industry.
Therefore sustainable farming practices should be in harmony with other economic activities
in natural resources, thus balanced with production, marketing and other supporting services
while producing a reasonable and relatively stable income and benefits to the farmers.
Moreover farming system having bio-technically, environmentally sound and socio-
economical viability is important.
Following measures are important while improving economic viability and long term farm
level sustainability of small scale shrimp farmers in Sri Lanka:
• increase in production quantity
• reduction in production costs
• diversify market and products
• improve quality of products
• minimizing negative environmental impacts

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The present study only evaluated the effect of varying economic variables on the profitability
of shrimp farming. However, other biological, external or technical aspects which are of great
importance to the economic viability of such investments were not evaluated in this analysis
(Zuniga 2009). Therefore, investors need to look at bio-economic modeling, effects of growth,
mortality of shrimp, diseases, predation, environmental conditions, climate, market demand
and other issues before making a decision. Cao (2012) indicated that disease outbreak could
cause only 12% to 36% crop reduction at the best or most probable cases, and as much as 78%
crop reduction at the worst case in shrimp farming in China. However, under the worst case
scenario in his model, massive crop failure would produce zero to negative returns for intensive
farming. The probability of yield lost was 15.6 times higher in the wet season than dry season
while survival rate of the dry season crop (59%) was significantly higher (p<0.05) when
compared with wet season crop (49%) in Vietnam (Son et al. 2010). The reason might be more
difficulties of pond drying, lower salinity and more risky of disease spreading due to pond
water overflow during wet season. Further social costs and taxes on discharging effluents are
important cost items, which need to be considered in a conventional financial analysis.
The required information was collected from a limited area which may not present the actual
situation all over the country. Land value in initial investments cost and interest rates on loans
can be highly variable with place and year. Therefore, constant input and output expenses used
in present analysis may not be true indicators for future economic analysis. There are two
production cycles operated during dry and wet seasons of year. There are differences of
productivity between these two cycles. Such differences were not accounted for in this study.
6 CONCLUSION AND RECOMMENDATIONS

The goal of this study is to do an assessment of the financial viability of small scale shrimp
farming in the North-Western province of Sri Lanka by addressing the economical
sustainability of the shrimp farming systems in the long run. The profitability model as a
decision support tool was developed to assess the profitability of shrimp farming enterprises.
The analysis explains the systems across different economic viability measures like net present
value, internal rate of return, payback period and break-even point. Furthermore, risk analysis
measures of uncertainty are calculated with respect to changes in input variables, such as
operational cost, investment cost, production and sales price. The development of a risk
assessment will help the actors at the different levels to make informed decisions regarding
economic sustainability of shrimp farming.
Operating a 1-ha shrimp farm (6.5 ha of pond area) give a total and net cash flow of US$ 8,775
and US$ 6,927 after one year operation and it was US$ 95,176 and US$ 84,093 in sum of cash
flow at the end of a ten years operation. The high NPV and IRR values and a relatively short
pay-back period in the present study indicate that the investment is highly profitable. The net
current ratio and debt service coverage ratio was continually above 1.5 showing that higher
capability of a farm to pay back immediately its liabilities and cash flow from the operations is
well above the repayment and interest of loans, which have to be paid. A positive cash flow
after first year of operation means that the net income is higher than the amount needed to cover
expenses. Risk analysis showed that farming is most sensitive to sales price, while other factors
had less effects. Significant decrease (20%) in sales price results in an IRR under 13% which
is not profitable and might destroy the economic viability of the shrimp farm. Though the
operation is profitable, it has a 28% of frequency of considerable risk receiving negative NPV.
Thus, in order to avoid huge losses following uncertainties in the international market price in

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the shrimp industry, care and attention must be paid to achieving reasonable farm gate price.
The results of economic indicators of this evaluation help to assist potential investors in making
their decisions.
The cost of initial investment vary depending on value of farm site, pond preparation and
production strategy. Land is often the major initial investment. However, due to the availability
of already constructed ponds in the north-western area, farmers do not need to construct any
new ponds. Infrastructure facilities, equipment, feed, post larvae, electricity, labor and
chemicals are major inputs for producing shrimp. Though stocking density was positively
correlated to profitability, it should not exceed a pond’s carrying capacity. Electricity use was
identified as a hotspot of shrimp production. Operating of re-circulating water systems, water
exchanged only when necessary, rather than on a routine schedule were activities which help
further reduce additional use of electricity or fuel for pumping water.
Though various policies exist for development of shrimp aquaculture, so far no policy exists in
relation to the marketing of shrimp products. One of the threats to the Sri Lankan shrimp
industry is price fluctuations of European, Japan and United States markets because of
environmental and health concerns of consumers. Dependence on EU for market share has
increased risk of market failure.
The following are important for marketing of shrimp farming in Sri Lanka:
• Marketing campaigns to raise awareness on environmentally and socially
sustainable farming practices
• product differentiation and coordinate its market promotion
• international trade agreements
• product quality control
• privilege to new production strategies
• genetically modified products
• eco-labeled or organic certified shrimp products
Organic aquaculture is a market-driven initiative and organic products receive 10-40% higher
price than conventional products (INFOFISH 2011). The European Union (EU), United States
of America and Japan are the major markets for organic/eco-labeled or certified food and
beverage. Certification programs have not been widely established in Sri Lanka since the
majority of shrimp farms are small-scale, family operated. Further prohibited chemicals in any
of the countries where the shrimp will be sold should never be used. In order to take right
actions and avoid financial losses due to reduction of sales price, it is necessary to closely
monitor fluctuations of demand and sales prices in local/international markets.
Reducing surcharge for export processed shrimp products to be vary (fresh - frozen/chilled,
dried and canned) according to the variation of world price of frozen shrimp. It is advisable for
farmers/exporters to increase value addition in processing to their shrimp and thus increase
their market opportunities.
The feed conversion ratio (FCR) is around 1.3 in present study indicates that relatively higher
feeding efficiencies, compared with 1.9 reported in Sri Lanka by Shang et al. (1998),
recommended value of 1.6-1.9 by UNEP/GPA (2003) and 1.6 in Vietnam (Son et al. 2011).
The feed cost accounts for 55% of the variable cost, since the feed is mainly imported from
south-east Asian countries like Thailand. A majority of farmers used wild captured shellfish
and fish as a high protein supplement to increase growth rate and reduce feed cost. The clams

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and fish were not always cooked or commercial feed was not screened for pathogens.
Therefore, it is suggested that further research would support the development of own local
feed with less cost, high nutritional and pathogen free feed by utilizing locally available
materials for feed instead of imported ones.
According to Munasinghe et al. (2010), 80% of farmers used lime and/or dolomite to adjust
the pond bottom pH. Nevertheless, amount applied depends on the farmers’ experience and
economic situation. The chemical is the second most variable cost (US$ 2000) and it was 19%
of variable cost in the present study. To avoid an irregular basic application, farmers need to
check the soil pH and calculate the amount of lime and dolomite to be applied. Recommended
lime application during pond preparation was <1,000 kg/ha of CaCO3 lime or <500 kg/ha of
Ca(OH)2 lime when soil pH is higher than 6 and it was <3,000 kg/ha of CaCO3 lime or <1,500
kg/ha of Ca(OH)2 lime when soil pH is less than 5 (MPEDA/NACA 2003).
Shrimp farming in Sri Lanka is facing many challenges such as disease outbreaks, limitation
of resources and increasing production costs. High quality of pond management and
maintaining ambient environment for acceptable ranges through adopting the best management
practices (BMP) for shrimps are major factors for ensuring economic sustainability of farming
systems. It reduces outbreaks of disease which is a most critical factor determining farm profit.
Introducing of specific pathogen free (SPF) strains of white shrimp (Litopenaeus vannamei),
which were more disease resistant and grew faster than local strains (Lightner 2005) will help
to solve the issue of poor seed quality and reduce the risk of disease outbreak. The majority of
small scale farmers have little knowledge about operational and management decisions for
sustainable farming. As a result, rising production cost became a critical factor determining
farms profits.
Therefore, assessment of long term production trends,

• understanding, upgrade the knowledge
• management need awareness and enhance extension training services
• encourage of better record keeping are important for learning their mistakes.
Many small-scale shrimp producers have had to produce and market their products without
access to reliable or affordable input suppliers, integrated production-distribution chains with
buyers, retailers and processors, financial, technical or transport services and particularly
towards improving biosecurity. Therefore, it is necessary to establish strong clusters in order
to provide opportunity to increase competitiveness of the industry by strengthening network
among the stakeholders including, hatcheries, producers, collection points and markets, traders,
processing, exporters and all other associated services like feed and chemical suppliers,
consultant services, transportation, labor contractors etc.
Shrimp farmers are reporting that lack of financial resources was a major problem for running
the business of shrimp farming (Munasinghe et al. 2010). The household economy of small
scale farmers, who generally have few assets or savings, are not enough for initial
implementation of shrimp farming. Farmers are reluctant to take bank loans because of high
interest rates. Because of high risks and production failures, banks are also reluctant to provide
loans for shrimp farming. As high level of initial cash required for investment, it is
recommended to provide loan/financial support by the government at the micro-level with
reasonable interest rates.

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Strengthening the present community based shrimp farmers associations to manage and operate
financial support schemes to provide credit and capital resources to members in crisis situations
is necessary. Farms are partially insured against natural disasters, such as flooding, drought,
disease or uncertain financial losses and they themselves have also contributed to a common
fund by contributing some proportion of profits for many years. The government authorities
have also required to add to the fund in order to help cover potential losses. Further the
government of Sri Lanka needs strongly taken steps to impose a tax of shrimps exported in
order to subsidy for environmental management, research and development to ensure that
sustainability and long run of shrimp farming in Sri Lanka.
A useful benefit of retained earnings is to reinvest. Farmers may have plans to expand their
farms so that profit can be turned back into through infrastructure and products development,
services or to invest in more marketing and promotion that will be more sustainable.
Despite the fact that present study evaluates only small scale to assess the profitability of
shrimp farming, it is worthwhile to look at large or intensive commercial scale in the future
studies.

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ACKNOWLEDGEMENTS
I wish to express my sincere thanks and deepest sense of gratitude to my advisors Professor
Pall Jensson, Faculty of Engineering, Reykjavik University for his timely help, unfailing
guidance, invaluable suggestions, and encouragement throughout the study.
I would like to place on record my immense gratitude and appreciation to Dr. Tumi Tomasson,
programme director, UNU Fisheries Training Programme, for selecting me to participate in the
programme. Many thanks also to the Deputy Director of the Programme, Mr. Thor Asgeirsson,
for assistance and guidance during the programme. My special thanks to Ms. Sigríður Kr.
Ingvarsdóttir for her especially lovely administrative support and Ms. Mary Frances for her
guidance.
It is my pleasure to acknowledge, Professor Helgi Thorarensen, Olafur Sigurgeirsson and other

staff of Holar university for the special training in aquaculture. I am indebted to the director of
the Marine Research Institute (MRI) and staff for the facilities and all the people who inspired,
helped and encouraged me during my study.
I greatly acknowledge the financial assistance from United Nations University to successfully
carry out the training programme.
The author would like to express his deep appreciation to the ministry of Fisheries and Aquatic
Resources Development and National Aquatic Resources Research and Development Agency
of Sri Lanka for allowing me to participate in this training programme.
Thanks for UNU-FTP fellows of 2014/2015 for their friendship and social company during the
program.
Above all, I am greatly obliged to my parents and beloved wife Maheeni for her loving support,
belief in my potential and patience to live without me during the six month training in Iceland.
My loving son Mahindu, you are dearly missed and always loved.

Gammanpila
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APPENDIX
Appendix 1: Cost and expenses of three small scale farms in north-western province of
Sri Lanka.
Farm 1 Farm 2 Farm 3
Investment Cost (US$)
Investment for land+ponds 17,700 34,615 **
Buildings 1,600 * 3,270
Fencing 3,350 8,077 3,100
Cost of equipment 4,350 692 580
Total Investment Cost 27,000 43,384 6,950
Fixed Cost
License/reports(year) 60 60 60
Labor charges (2× 4 month) 1,240 1,850 1,230
Consultant fees (per month) 616 615 615
Pond renovation 620 970 925
Total Fixed Cost 2,536 3,495 2,830
Variable Cost
Post Larvae 969 981 948
Feed:
Commercial feed 4,931 5,162 4,910
Supplementary feed 672 462 580
Electricity 1,102 1,154 1,080

Chemicals/Lime/Dolomite 2,000 1,769 1,923
Transport cost (fingerlings) 40 8 12
Fuel 200
Harvesting charges 300 308 308
Other (telephone, etc…) 50 100 75
Total Variable Cost 10,264 9,944 9,836
TOTAL COST 12,800 13,439 12,666
Production 2350 2420 2400
Gross Revenue 19,523 20,060 19,392
Note: * Farm 2 (cost of buildings and several equipment were included in land value)
** Farm 3 (land value is not included as farmer owned land)

Appendix 2: Profitability model - Summary, Assumptions and Results
Assumptions and Results
2014 Discounting Rate 15% MARR
Investment: US$ Planning Horizon 10 years
Land 17,700
Buildings 1,600
Equipment 100% 4,350 Total Cap. Equity
Other 3,350 NPV of Cash Flow 33,003 34,993
Total 27,000 Internal Rate 41% 74%
Financing:
Working Capital 1,000 Capital/Equity 9.5
Total Financing 28,000 after 10 years
Equity 100% 40%
Loan Repayments 100% 10 years Minimum Cash Account 664
Loan Interest 100% 11%
Operations: 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Sales Quantity 100% 4,700 4,700 4,700 4,700 4,700 4,700 4,700 4,700 4,700 4,700 kg/year
Sales Price 100% 8.31 8.31 8.31 8.31 8.31 8.31 8.31 8.31 8.31 8.31 US$/kg
Variable Cost 100% 4.37 US$/kg
Fixed Cost 100% 5,012 US$/year
Inventory Build-up
Debtors (Acc received) 20% of turnover
Creditors(Acc payable) 15% of variable cost Breakdown Costs Colour code
Dividend 10% of profit Variable Costs 205,390.00 68% Assumptions
Depreciation Buildings 4% Fixed Cost 50,120.00 17% Results
Depreciation Equipment 10% Paid Taxes 8,153.55 3%
Depreciation Other 20% Financial Costs 12,163.20 4%
Loan Management Fees 2% Repayments 15,120.00 5%
Income Tax 8% Paid Divident 9,410.18 3%
Total 300,356.94
This paper should be cited as:

Gammanpila, M. 2015. Economic Viability of small scale shrimp (Penaeus monodon) farming in the north-western province of Sri Lanka. United Nations University Fisheries
Training Programme, Iceland [final project].http://www.unuftp.is/static/fellows/document/menake14prf.pdf
Gammanpila
Appendix 3: Profitability model - Investment and Finance

Investment and Financing
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Total
1 2 3 4 5 6 7 8 9 10
Investment:
Land 17,700 17,700 17,700 17,700 17,700 17,700 17,700 17,700 17,700 17,700 17,700
Buildings 1,600 1,536 1,472 1,408 1,344 1,280 1,216 1,152 1,088 1,024 960
Equipment 4,350 3,915 3,480 3,045 2,610 2,175 1,740 1,305 870 435 0
Other 3,350 2,680 2,010 1,340 670
Booked Value 27,000 25,831 24,662 23,493 22,324 21,155 20,656 20,157 19,658 19,159 18,660
Depreciation:
Depreciation Buildings 4% 64 64 64 64 64 64 64 64 64 64 640
Depreciation Equipm. 10% 435 435 435 435 435 435 435 435 435 435 4,350
Depreciation Other 20% 670 670 670 670 670 3,350
Total Depreciation 1,169 1,169 1,169 1,169 1,169 499 499 499 499 499 8,340
Financing: 28,000
Equity 40% 11,200
Loans 60% 16,800
Repayment 10 1,680 1,680 1,680 1,680 1,680 1,680 1,680 1,680 1,680 15,120
Principal 16,800 16,800 15,120 13,440 11,760 10,080 8,400 6,720 5,040 3,360 1,680
Interest 11% 1,848 1,848 1,663 1,478 1,294 1,109 924 739 554 370 11,827
Loan Managem. Fees 2% 336

Gammanpila
Appendix 4: Profitability model - Operations statement

Operations
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Total
Operations Statement
Sales kg/year 4,700 4,700 4,700 4,700 4,700 4,700 4,700 4,700 4,700 4,700 47,000
Price USD/kg 8 8 8 8 8 8 8 8 8 8
Revenue (US$/year) 39,057 39,057 39,057 39,057 39,057 39,057 39,057 39,057 39,057 39,057 390,570
Variable Cost 4 20,539 20,539 20,539 20,539 20,539 20,539 20,539 20,539 20,539 20,539 205,390
Fixed Cost 5012 5,012 5,012 5,012 5,012 5,012 5,012 5,012 5,012 5,012 5,012 50,120
Diverse Taxes
Operating Surplus (EBITDA) 13,506 13,506 13,506 13,506 13,506 13,506 13,506 13,506 13,506 13,506 135,060
Inventory Movement
Depreciation 1,169 1,169 1,169 1,169 1,169 499 499 499 499 499 8,340
EBIT (Operating Gain/Loss) 12,337 12,337 12,337 12,337 12,337 13,007 13,007 13,007 13,007 13,007 126,720
Financial cost ( Interest+LMF) 336 1,848 1,848 1,663 1,478 1,294 1,109 924 739 554 370 12,163
EBT (Profit Before Tax) -336 10,489 10,489 10,674 10,859 11,043 11,898 12,083 12,268 12,453 12,637 114,557
Loss Transfer 0 -336 0 0 0 0 0 0 0 0 0 0

Taxable Profit 0 10,153 10,489 10,674 10,859 11,043 11,898 12,083 12,268 12,453 12,637
Income Tax 8% 0 812 839 854 869 883 952 967 981 996 1,011 9,165
Profit After Tax -336 9,677 9,650 9,820 9,990 10,160 10,946 11,116 11,286 11,456 11,626 105,392
Dividend 10% 0 968 965 982 999 1,016 1,095 1,112 1,129 1,146 1,163 10,573
Net Profit/Loss -336 8,709 8,685 8,838 8,991 9,144 9,852 10,005 10,158 10,311 10,464 94,819

Gammanpila
Appendix 5: Profitability model - Cash flow

Cash Flow
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Total
Cash Flow
EBITDA Operating Surplus 0 13,506 13,506 13,506 13,506 13,506 13,506 13,506 13,506 13,506 13,506 135,060
Debtor Changes 7,811 0 0 0 0 0 0 0 0 0 7,811
Creditor Changes 3,081 0 0 0 0 0 0 0 0 0 3,081
Inventory Changes 0 0 0 0 0 0 0 0 0 0 0
Cash Flow before Tax 0 8,775 13,506 13,506 13,506 13,506 13,506 13,506 13,506 13,506 13,506 130,329
Paid Taxes 0 812 839 854 869 883 952 967 981 996 8,154
Cash Flow after Tax 0 8,775 12,694 12,667 12,652 12,637 12,623 12,554 12,539 12,525 12,510 122,176
Financial Costs ( Interest-LMF) 336 1,848 1,848 1,663 1,478 1,294 1,109 924 739 554 370 12,163
Repayment 0 0 1,680 1,680 1,680 1,680 1,680 1,680 1,680 1,680 1,680 15,120
Free Net Cash Flow -336 6,927 9,166 9,324 9,494 9,664 9,834 9,950 10,120 10,290 10,460 94,893
Paid Dividend 0 968 965 982 999 1,016 1,095 1,112 1,129 1,146 9,410
Financing - (Working capital) 1,000
Cash Movement 664 6,927 8,198 8,359 8,512 8,665 8,818 8,856 9,009 9,162 9,315 86,483

Gammanpila
Appendix 6: Profitability model - Source and allocation of funds

Source and Allocation of Funds
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Total
Source of Funds
Profit before Tax -336 10,489 10,489 10,674 10,859 11,043 11,898 12,083 12,268 12,453 12,637 114,557
Depreciation 0 1,169 1,169 1,169 1,169 1,169 499 499 499 499 499 8,340
Funds from Operations -336 11,658 11,658 11,843 12,028 12,212 12,397 12,582 12,767 12,952 13,136 122,897
Loan Drawdown 16,800 16,800
Equity Drawdown 11,200 11,200
Funds for allocation 27,664 11,658 11,658 11,843 12,028 12,212 12,397 12,582 12,767 12,952 13,136 150,897
Alloction of Funds
Investment 27,000 27,000
Repayment 0 0 1,680 1,680 1,680 1,680 1,680 1,680 1,680 1,680 1,680 15,120
Paid Taxes 0 0 812 839 854 869 883 952 967 981 996 8,154
Paid Dividend 0 0 968 965 982 999 1,016 1,095 1,112 1,129 1,146 9,410
Total allocation 27,000 0 3,460 3,484 3,516 3,548 3,579 3,726 3,758 3,790 3,822 59,684
Changes Net Curr. Assets 664 11,658 8,198 8,359 8,512 8,665 8,818 8,856 9,009 9,162 9,315 91,213
Analysis of Changes
Current Assets
Cash at start of year 0 664 7,591 15,790 24,148 32,660 41,325 50,142 58,998 68,006 77,168
Cash at end of year 664 7,591 15,790 24,148 32,660 41,325 50,142 58,998 68,006 77,168 86,483
Changes in Cash 664 6,927 8,198 8,359 8,512 8,665 8,818 8,856 9,009 9,162 9,315 86,483
Debtor changes 0 7,811 0 0 0 0 0 0 0 0 0 7,811
Stock Movements 0 0 0 0 0 0 0 0 0 0 0 0
Changes in Current Assets 664 14,739 8,198 8,359 8,512 8,665 8,818 8,856 9,009 9,162 9,315 94,294
Liabilities
Creditor changes 0 3,081 0 0 0 0 0 0 0 0 0 3,081
Changes Net Curr. Assets 664 11,658 8,198 8,359 8,512 8,665 8,818 8,856 9,009 9,162 9,315 91,213

Gammanpila
Appendix 7: Profitability model – Balance sheet

Balance Sheet
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Balance Sheet
Assets
Cash Account 0 664 7,591 15,790 24,148 32,660 41,325 50,142 58,998 68,006 77,168 86,483
Debtors (Acc Received) 20% 0 7,811 7,811 7,811 7,811 7,811 7,811 7,811 7,811 7,811 7,811
Inventory Stock 0 0 0 0 0 0 0 0 0 0 0 0
Current Assets 664 15,403 23,601 31,960 40,471 49,136 57,954 66,809 75,818 84,979 94,294
Fixed Assets 27,000 25,831 24,662 23,493 22,324 21,155 20,656 20,157 19,658 19,159 18,660
Total Assets 27,664 41,234 48,263 55,453 62,795 70,291 78,610 86,966 95,476 104,138 112,954
Debts
Dividend Payable 0 968 965 982 999 1,016 1,095 1,112 1,129 1,146 1,163
Taxes Payable 0 812 839 854 869 883 952 967 981 996 1,011
Creditors (Acc Payable) 15% 0 3,081 3,081 3,081 3,081 3,081 3,081 3,081 3,081 3,081 3,081
Next Year Repayment 0 1,680 1,680 1,680 1,680 1,680 1,680 1,680 1,680 1,680 1,680
Current Liabilities 0 6,541 6,565 6,597 6,629 6,660 6,807 6,839 6,871 6,903 6,934
Long Term Loans 16,800 15,120 13,440 11,760 10,080 8,400 6,720 5,040 3,360 1,680
Total Debt 16,800 21,661 20,005 18,357 16,709 15,060 13,527 11,879 10,231 8,583 6,934
Equity 11,200 11,200 11,200 11,200 11,200 11,200 11,200 11,200 11,200 11,200 11,200
Profit & Loss Balance -336 8,373 17,058 25,896 34,887 44,031 53,882 63,887 74,045 84,356 94,819
Total Capital 10,864 19,573 28,258 37,096 46,087 55,231 65,082 75,087 85,245 95,556 106,019
Debts and Capital 27,664 41,234 48,263 55,453 62,795 70,291 78,610 86,966 95,476 104,138 112,954

Gammanpila
Appendix 8: Profitability model- Profitability measurements

Profitability
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 T ota l
Profitability Measurements
NPV and IRR of Total Cash Flow
Cash Flow after Taxes 0 8,775 12,694 12,667 12,652 12,637 12,623 12,554 12,539 12,525 12,510 122,176
Investment -27,000 -27,000
Total Cash Flow & Capital -27,000 8,775 12,694 12,667 12,652 12,637 12,623 12,554 12,539 12,525 12,510 95,176
NPV Total Cash Flow 15% -27,000 -19,369 -9,771 -1,442 5,792 12,075 17,532 22,251 26,350 29,911 33,003
IRR Total Cash Flow 0% 0% 0% 12% 25% 32% 36% 38% 40% 41% 41%
NPV and IRR of Net Cash Flow
Free (Net) Cash Flow -336 6,927 9,166 9,324 9,494 9,664 9,834 9,950 10,120 10,290 10,460 94,893
Equity Part of Investment -10,800 -10,800
Net Cash Flow & Equity -11,136 6,927 9,166 9,324 9,494 9,664 9,834 9,950 10,120 10,290 10,460 84,093
NPV Net Cash Flow 15% -11,136 -5,112 1,819 7,949 13,377 18,182 22,433 26,174 29,482 32,407 34,993
IRR Net Cash Flow 0% 0% 27% 52% 63% 69% 72% 73% 74% 74% 74%
Financial Ratios:
ROI:(Profit+Interest/Debt+Capital) 45% 30% 26% 22% 20% 19% 17% 15% 14% 12%
ROE: (Profit/Shared. Capital) 89% 49% 35% 27% 22% 20% 17% 15% 13% 12%
TR: (Revenue/Debt+Capital)=Asset Turnover 141% 95% 81% 70% 62% 56% 50% 45% 41% 38%
CR (Capital ratio) : (Capital/Debt+Capital) 47% 59% 67% 73% 79% 83% 86% 89% 92% 94%
Net Current Ratio: (Current Asset/Current Liability) 2.4 3.6 4.8 6.1 7.4 8.5 9.8 11.0 12.3 13.6
Liquid Current Ratio: (Current Asset - Inventory/Current Liabilities 2.4 3.6 4.8 6.1 7.4 8.5 9.8 11.0 12.3 13.6
Internal value of Shares: (Total Capital/Equity) 1.7 2.5 3.3 4.1 4.9 5.8 6.7 7.6 8.5 9.5
Debt Service Coverage: (cash flow after tax/interest-LMF+repayment)4.7 3.6 3.8 4.0 4.2 4.5 4.8 5.2 5.6 6.1
Accepatable Minimum 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5

Gammanpila
Appendix 9: Profitability model - Sensitivity analysis

Deviations Percentage Cost of NPV of Sales NPV of Sales NPV of Variable NPV of Fixed cost NPV of
equipment equipment quantity sales price sales cost (US$) variable (US$) fixed cost
(US$) (kg) quantity (US$) price cost
(US$)
-50% 50% 2,175 36,856 2,350 -6,346 4.16 -55,953 10,264 81,785 2,506 46,738
-40% 60% 2,610 36,483 2,820 1,922 4.99 -37,031 12,316 72,426 3,007 44,389
-30% 70% 3,045 36,111 3,290 10,189 5.82 -18,108 14,369 63,068 3,508 42,040
-20% 80% 3,480 35,738 3,760 18,457 6.65 -206 16,422 53,709 4,010 39,691
-10% 90% 3,915 35,365 4,230 26,725 7.48 17,367 18,474 44,351 4,511 37,342
0% 100% 4,350 34,993 4,700 34,993 8.31 34,993 20,527 34,993 5,012 34,993
10% 110% 4,785 34,620 5,170 43,260 9.14 52,619 22,580 25,634 5,513 32,644
20% 120% 5,220 34,247 5,640 51,528 9.97 70,245 24,632 16,276 6,014 30,295
30% 130% 5,655 33,875 6,110 59,796 10.80 87,871 26,685 6,917 6,516 27,946
40% 140% 6,090 33,502 6,580 68,064 11.63 105,497 28,738 -2,441 7,017 25,596
50% 150% 6,525 33,129 7,050 76,331 12.47 123,123 30,791 -11,800 7,518 23,247
Appendix 10: Cost structure of semi-intensive shrimp farming systems in Asian countries, 1994 (ADB/NACA, 1996).
Indonesia Philippines Malaysia Vietnam India Sri Lanka China
General
Average farm size (ha) 2.0 7.5 2.1 1.4 6.4 2.5 24.5
Stocking density (PL/m2) 20.7 15.5 39.0 11.5 24.3 28.8 19.7
FCR 1.4 1.7 1.9 0.3 2.4 1.9 2.1
Production (kg/ha/yr) 1,479 2,701 4,693 662 2,374 5,040 848
Cost (US$)
Fixed cost (US$/kg) 0.82 0.34 1.59 1.11 1.62 0.96 0.76
Variable cost (US$/kg) 2.95 3.67 3.9 2.23 4.34 3.59 1.51
Total cost (US$) 3.78 4.01 5.5 3.34 5.96 4.56 2.27
Farm gate price (US$) 6.83 6.55 7.03 5.63 7.27 7.56 3.21
Profit (US$/kg) 3.05 2.54 1.53 2.29 1.31 3.00 0.94

Economic Viability of Small Scale Shrimp (Penaeus Sri Lanka: Monodon) Farming in The North-Western Province of

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is Final Project 2014

ECONOMIC VIABILITY OF SMALL SCALE SHRIMP (Penaeus

Key words: Cost-benefit analysis, Economic viability, Profitability, Shrimp farming

This paper should be cited as:

UNU Fisheries Training Programme 2

Figure 1: Life cycle of penaeid shrimp. ..................................................................................... 7

UNU Fisheries Training Programme 3

Table 1: Comparison of past and present impacts. .................................................................. 10

UNU Fisheries Training Programme 4

UNU Fisheries Training Programme 5

The purpose of the study was to:

3) Provide recommendation with respect to economics to support the development of

UNU Fisheries Training Programme 6

2.2 Ecology and life history of P. monodon shrimp

Figure 1: Life cycle of penaeid shrimp (CSIRO 2011).

UNU Fisheries Training Programme 7

2.3 Present situation of world shrimp aquaculture

UNU Fisheries Training Programme 8

2.4 Overview of the shrimp aquaculture in Sri Lanka

2.4.1 Importance of shrimp aquaculture in Sri Lanka

UNU Fisheries Training Programme 9

2.4.2 Culture facility of shrimp (P. monodon) farming in Sri Lanka

Table 1: Comparison of past and present impacts (Galappaththi 2013).

Semi-intensive operations practice intermediate levels of investment while investors are

2.5 The economics of shrimp farming at the farm level

Farm profitability is always dependent on management practices and influenced by fluctuation

UNU Fisheries Training Programme 10

Results of comparison study by Primavera (1993) in three management systems, extensive,

UNU Fisheries Training Programme 11

3.2 Data collection

UNU Fisheries Training Programme 12

3.3 Analytical technique

3.4 Profitability model of shrimp farming

• Assessing the cost factors associated with production

3.5 Measures of profitability

3.5.1 Viability of investments

Net Present Value (NPV)

UNU Fisheries Training Programme 13

Where, - C0 = Initial investment, Ci = Cash flow, r = Discount rate, T= Planning horizon

Internal Rate of Return (IRR)

1. Total capital invested and cash flow after taxes

Payback period (PBP)

Break-even point (BEP)

Break-even production and breakeven selling price were calculated as follows:

UNU Fisheries Training Programme 14

Variable cost per unit production)

3.5.2 Financial ratios

Net Current Ratio (NCR)

Net Current Ratio: Current assets / Current liabilities

Debt service coverage (DSCR)

3.6 Risk analysis

Risk analysis typically seeks to answer four questions:

UNU Fisheries Training Programme 15

3.6.1 Sensitivity analysis

3.6.2 Scenario analysis

3.6.3 Monte Carlo simulation

3.6.4 Qualitative risk analysis

UNU Fisheries Training Programme 16

Table 2: Technical/financial information and assumptions used in one farm model of

3.7.1 Initial investment requirement

UNU Fisheries Training Programme 17